In this issue of 1040Return.com November Newsletter

Many taxpayers have made simple errors on their 2007 returns that are delaying stimulus payments. In a recent news release, IRS identified the most common mistakes and misconceptions:

Filing more than one return. Some taxpayers are filing both a paper and an electronic return in an effort to speed up the process, but this only slows it down. When IRS receives two returns, payments are delayed. It takes IRS up to 12 weeks to process the paper returns.

Listing monthly instead of annual income. Taxpayers should list their annual amount of qualifying income. Qualifying annual income includes at least $3000 in earned income, combat pay, or benefits from Social Security, Veterans Affairs and Railroad Retirement.

Small tax liability reduces payment amount. Some taxpayers who have little or no tax liability may get a smaller stimulus check than they expected. The law provides for a minimum of $300 and a maximum of $600 for individuals OR an amount equal to a taxpayer's tax liability, whichever is less. If people have no tax liability, but have at least $3000 in qualifying income, they will be eligible for the minimum $300 stimulus payment.

Amending 2007 returns won't fix stimulus error. In general, if taxpayers make a mistake which results in no stimulus payment, filing an amended return will not result in an adjustment of the payment amount this year. Rather, such taxpayers will have another chance to claim the full payment when they file their 2008 tax returns in 2009. Only low-income individuals and recipients of Social Security, railroad retirement or certain veteran's benefits who filed their original returns before IRS issued guidance for their situation will be able to get a stimulus payment based on a 2007 amended return.

Wrong address A number of payments are going to old addresses and are thus being returned to the IRS. If taxpayers move after filing for the stimulus checks, they must make some provision for having their mail forwarded by the U.S. Postal Service or they must file a Form 8822 Change of Address notice with the IRS immediately. The IRS has already issued 90 percent of the economic stimulus payments but expects to issue more through December 2008. Taxpayers can track the status of their payments on www. irs.gov, under the link to "When Will You Get Your Stimulus Payment?"

Credit is 10% of the purchase price of the home, with a maximum for $3750 for individuals and $7500 for married couples filing jointly.

Principal residence only-no vacation homes or rental properties.

Available only for first-time home buyers or those who have not owned a home in the past three years.

Phased out for modified AGI between $150,000-$170,000 for married joint filers and $75,000-$95,000 for individuals.

Repayment. The credit must be repaid over fifteen years. Within two years of taking the credit, one-fifteenth of the credit amount (or $500 each year for a $7500 credit) must be included as an addition to tax on a taxpayer's 2010 return. This is not an addition to taxable income, but an actual increase in the tax owed for the year. The timing works this way. Repayment begins the second tax year after the year the credit is claimed. So if the credit is claimed in 2008, the repayment begins in 2010. If the credit is claimed in 2009, the repayment begins in 2011.

Procedure. The credit is claimed on new IRS Form 5405, which will be available later this year on the www.irs.gov website. Note that taxpayers purchasing a home in 2008 can claim the credit on their 2009 return or can file an amended return for 2008.

Ouch! If the taxpayer stops using the home as a principal residence or sells the home before the credit is paid back, all installments come due in the year of sale or conversion to another use. That means the entire amount must be repaid on a single year's tax return.

Hint. Taxpayers who claim the credit may want to increase their withholding or estimated payments to cover the yearly additions to tax they face during the repayment period.

In the August/September 2008 issue, we explained the new regulations on the custodial and noncustodial parents' rights to claim a child as a dependent and discussed the new procedures under the regulations for filing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents.

Now, in a move that is sure to lessen the friction between divorced spouses, IRS has said that it will automatically treat a child as a dependent of both parents whether or not the custodial parent consents. Under a recent Revenue Procedure, a child of divorced parents will now be treated as a dependent of both parents for purposes of the folowing key deductions and exclusions including:

exclusion for employer-provided medical expense reimbursements

exclusion of employer-provided coverage under accident and health plans

exclusion for qualified employee discounts

deduction for medical expenses

exclusion for distributions from Archer Medical Savings Accounts-(MSAs) and Health Savings Accounts

This treatment only will apply if the taxpayer-parents are divorced, legally separated under a court order, or live apart at all times during the last 6 months of the calendar year. The child must receive over one-half of his or her support during the calendar 'year from the parents and must be in the custody of one or both parents for more than half of the calendar year. Finally, the child must be a "qualifying child" or "qualifying relative" of one of child's parents based on their family connection to the parent or based on their being a member of a parent's household under the general dependency rules.

Observation: Before the 2004 change, children of divorced or separated parents were treated as dependents of both parents for purposes of these deductions and exclusions whether or not a parent released the claim to the exemption. In the 2004 and 2005 tax bills, in an attempt to clean up and standardize the dependency rules, Congress retreated from this position and put IRS in the middle of these controversies by requiring proof that one parent had released the exemption to the other parent before the noncustodial parent could take advantage of certain employer provided fringe benefits or the medical deduction for their children. This must have been too much for IRS to police, so IRS has gone back to allowing both parents to claim these benefits for their children.

Under the Code, a taxpayer whose modified adjusted gross income for a year does not exceed $100,000 (and who, if married, files jointly) may convert an amount held in a non-Roth IRA to a Roth IRA without paying an extra penalty tax. Because traditional IRAs are established with before tax income, when converting to a Roth, the taxpayer is taxed on the value of the nonRoth IRA being converted.

Conversions take many forms, but usually are done by a rollover where either the taxpayer gets a distribution and then puts it in another account or the trustees of the two plans transfer the taxpayer's funds directly from one account to another. A third possibility is that the non-Roth IRA is redesignated as a Roth IRA.

In the case of a conversion involving property, the conversion amount generally is the fair market value of the property on the date of distribution. The final regulations address how to value distributions from a retirement annuity contract when it is being converted to a Roth. The valuation rules were changed in the final regulations to set the distribution amount as the surrendered cash value of the annuity. This change is a simplification from the valuation methods proposed in the initial regulations.

Observation: Through 2009, taxpayers must have modified adjusted gross income of less than $100,000 to rollover traditional IRAs into Roths without paying a penalty. They also must file jointly, if married, to perform this type of rollover. For tax years beginning after 2009, the income limit goes away and so does the filing status requirement. Thus, although taxpayers will be taxed on the rollover amount, they will be able to permanently avoid tax on the earnings which accumulate in the Roth IRA. Taxpayers with in a lower tax bracket from the bad economy should definitely consider a Roth conversion since their taxable income from the change will be taxed at a lower marginal rate.

IRS Whistleblower Office Director Stephen Whitlock has announced that the whistle blower claims have risen dramatically in 2008, with upwards of 900 claims so far this year. IRS believes the increase is due to the fact that possible rewards are higher than they were under the old law. Now, for cases in which the taxes, penalties, interest and other amounts in dispute exceed $2 million, the IRS will pay 15 to 30 percent of the amount collected to the whistleblower. If the case deals with an individual, the taxpayer who gets turned in by the informant must have annual gross income of more than $200,000. If these qualifications are not met, whistleblowers can still get an award maxing out at 15 percent of the amount collected up to $10 million.

Procedure. Claims for awards must be filed on Form 211 Application for Reward for Original Information.

Key Point: Most new claims come from disgruntled spouses, business partners, or key employees, according to IRS.

The good news for taxpayers in the GO Zones or Kansas Relief Areas is that they essentially get to double-dip on depreciation deductions. They can take advantage of both the existing tax relief measures and the new increased limits under the Economic Stimulus bill. This can result in these taxpayers having up to $350,000 in expending write-offs with a $1,400,000 limit on equipment purchases for 2008.

IRS also cautions that since the expensing limits change from 2008 to 2009 and beyond, a problem can arise when a partner's or S Corporation shareholder's tax year does not coincide with the partnership or S Corporation's. When this happens, a partner or S Corporation shareholder's expensing deduction can be delayed until the entity's tax year.

PracticeTip: Note the IRS will allow taxpayers without its consent to make an expensing election by filing an amended return.

IRS is delaying for two years the effective date of a 2006 ruling which requires vouchers for employer-provided transportation benefits. The reason for the delay is that mass transit systems around the nation have not been able to develop the technology to generate acceptable vouchers from the use of electronic transportation cards. These cards, provided as an excludable fringe benefit by some employers, allow taxpayers free or reduced price transportation on subways, busses, ferries and multi-passenger commuting vehicles. Considering the price of gas, these transportation benefits will be used more and more as Americans turn toward public transportation. The delay in the voucher rule is until January 1, 2010.